Home-Loan Rates to Stay High for Longer

If you were hoping for a cut in your home mortgage or loan on your car, as a result of easing inflation and slowing growth, you’ll have to wait much longer than expected thanks to recent measures taken by India’s central bank.

This will be a setback for individual borrowers, who haven’t seen a reduction in their mortgage rate for more than a year, despite the fact that RBI has cut the benchmark interest rate by 1.25 percent points to 7.25%, since April 2012. The major Indian banks have only marginally passed on this lower rate to consumers and currently charge between 9.95% and 12% for the typical home mortgage, depending on the amount and tenure of the loan.

Lately, however, banks were under pressure from the Indian finance minister to cut rates, in order to boost economic growth.

Earlier this month, a handful of state-run banks such as the Union Bank of India, Bank of India and Canara Bank, lowered their base rate – the minimum interest rate it can charge a borrower – by a quarter percentage point.

But in light of RBI’s recent measures, analysts say there won’t be any more cuts.

If anything, they say, there’s a slight chance that the RBI could increase interest rates, in an effort to make Indian assets more attractive to foreign investors – which would help stem the decline of the rupee.

The Indian currency has lost more than 10% of its value against the dollar since the beginning of May, and fell to a record low of 61.21 to a dollar earlier this month. On Tuesday morning, it recovered to 59.17 for a dollar.

To keep the rupee from falling further, the RBI announced measures to reduce the availability of Indian currency in the system and thereby boost its value. These steps include increasing the interest rate at which banks can borrow from the RBI under a route called the Marginal Standing Facility, which is basically an emergency borrowing window. Banks will have to pay 10.25% interest to borrow from this window versus 8.25% earlier.

If the RBI keeps the higher rates in place for at least a quarter, banks will have to take tough decisions.

“Either they would have to raise the interest rate and take the risk of adding more bad loans, or absorb the higher cost of funds and operate at lower business margins,” said Vaibhav Agarwal, vice president of research at Mumbai-based Angel Broking Ltd.

Some bankers believe the RBI’s measures are temporary, bringing some cheer to those with loans. “I don’t think interest rates for medium to long-term loans [mortgage and vehicle loans] will rise until the market gets an idea of how long these measures would remain in force,” Jaideep Iyer, deputy chief financial officer with Mumbai’s Yes Bank, told India Real Time Tuesday.

The State Bank of India, the country’s largest lender, and the state-run IDBI Bank, said in statements following Monday’s move by the RBI, that they were not considering revising lending rates.

“The measures taken by RBI are designed to curb speculation in the market and are not seen by SBI as indicative of any systemic problem or deeper malaise,” the State bank of India said in a release.

Bankers are now awaiting the RBI’s monetary policy review on July 30, to get a sense of how long the restrictions will last.